Customs Duties Defined: Understanding Their Nature, Operational Mechanisms, and Who foots the Expense
Revised Article:
Tariffs are the hot topic on everyone's lips these days. In this plain-talk guide, we'll break down what tariffs are, how they operate, and who ultimately foots the bill. We'll also dive into the trade imbalance of the United States over the past seven and a half decades, shedding light on when the U.S. experienced a trade surplus and when it plunged into a trade deficit. Spoiler alert: America has been swimming in a trade deficit for most of the years since 1947, with only about 10% of the years showing a trade surplus. Learning about tariffs and who pays has become especially relevant in today's climate.
Tariffs 101
Tariffs are essentially a tax charged by one nation on imported goods and services from another country. One of the main reasons tariffs are imposed is to safeguard domestic businesses from cheaper foreign competition, as voiced by Shawn Fain, President of the U.A.W. Check out my March 10 article titled, "UAW President Shawn Fain Backs Trump's Tariffs. Here's Why" for a deeper dive.
Tariffs can also be called duties. Have you ever brought back items from a trip to Canada and been given the option to buy them "duty-free"? That means the items are tax-free – in other words, no tariffs were charged.
How Do Tariffs Work?
Tariffs can be applied to all imports from a specific country or just targeted goods. Apart from shielding domestic businesses, tariffs can generate revenue for the importing country, helping to cut down a budget deficit. They can also lead to a decline in economic growth, with consumers no longer able to buy the previously cheaper, foreign-made products, boosting the risk of recession.
In the modern global economy, imposing tariffs carries risks. Many U.S. companies heavily rely on foreign-made components to produce their products. When the U.S. levies high tariffs on those components, production costs rise, leading to an increase in the product's price. To keep costs down, a U.S.-based company may search for these components from another source, but the cost will often be higher within the U.S., largely due to higher wages ($65,470 in 2023) compared to countries like China ($39,218) or Mexico ($20,090). The higher wage equates to a higher cost of production, making it more expensive to manufacture. If domestic sources become available, purchasing from within the country can help boost the nation's GDP, provided the required materials are affordably priced.
Foreign Policy Tool
In addition to their financial strategy, tariffs can be used for foreign policy purposes. For example, tariffs can be a means of persuading foreign nations to reduce tariffs on U.S. products or services, which would boost U.S. exports. They can also be a leverage point to extract other concessions from a foreign country.
Who Pays the Bill?
The U.S. Customs and Border Protection agency collects tariffs at the border. Tariffs imposed on imports by the U.S. are paid by the importing company. Ultimately, consumers may bear the brunt of the additional costs as businesses pass the tariffs along. According to General Motors, they have pledged to absorb the cost of tariffs on their imports to the tune of $4-5 billion. However, small and medium-sized American businesses may not have the financial resources to do the same and will likely pass on the increase to customers.
A History of Tariffs and Trade in the U.S.
Tariffs have been a mainstay in the U.S. since its founding. Before the introduction of the modern income tax in 1913 with the ratification of the 16th amendment, tariffs were the primary source of revenue for the federal government. While trade is vital for the U.S. economy, it is not a dominant factor. The U.S. GDP in 2023 was primarily driven by consumer spending (68%), business spending (18%), government spending (17%), and net exports (-3%), indicating that closing the trade deficit would have a positive impact on GDP.
The chart below offers a glimpse into the trade history of the U.S. from 1947 to 2025, showing the trade surplus or deficit in each quarter. During this time frame, the U.S. had a trade surplus in 31 of the 313 total quarters, with a trade deficit in 282 quarters. Essentially, the U.S. has been running a trade deficit for about 90% of the time since 1947, with deficits worsening significantly in recent decades.
Despite losing nearly 90,000 manufacturing facilities and millions of jobs over the past 33 years, President Trump has chosen to implement substantial tariffs to bolster domestic manufacturing and secure more advantageous trade agreements. The final verdict remains to be seen. Will inflation rise? How long will it last? And at what cost to American consumers? The questions remain unanswered, but understanding tariffs and their impact on consumers is more crucial than ever.
To learn more about tariffs, check out my articles, "Trump's Tariffs Loom. There's More To It Than Most Understand," "Trump's Tariffs and Inflation – Who Pays?," and "Trump's Tariffs: What Every American Should Know."
Historical Perspective
Post-World War II to Late 20th Century: Trade Surpluses and Liberalization
- After World War II, the U.S. helped create the General Agreement on Tariffs and Trade (GATT) to cut tariffs and trade barriers globally, fostering economic recovery, international cooperation, and peace through interdependence.
- During this period, the U.S. had trade surpluses at times due to its dominant industrial power and role in global trade liberalization.
Late 20th Century to Early 21st Century: Growing Trade Deficits
- Starting in the late 20th century, particularly from the 1980s onward, the U.S. began to experience growing trade deficits, with rising imports and slow-growing exports.
- Trade deficits deepened due to factors such as the strong U.S. dollar, changing manufacturing competitiveness, and globalization.
Recent Years: Trade Deficits and Protectionist Policies
- By 2025, the U.S. goods and services trade deficit was substantial. In March 2025, the U.S. posted a trade deficit of $140.5 billion, with imports ($419.0 billion) significantly outpacing exports ($278.5 billion).
- Current years have witnessed protectionism, such as the imposition of broad tariffs to counter perceived unfair trade practices and reduce deficits. These tariffs, including a 10% baseline tariff and higher rates on specific countries and products, contributed to economic disruptions and a shrinking U.S. economy in early 2025.
In summary, the U.S. enjoyed trade surpluses in the immediate post-WWII decades due to its industrial strength and leadership in global trade liberalization. However, trade deficits have become more common, particularly from the late 20th century onward. The rise of tariffs and protectionist policies in recent years has contributed to increasing trade deficits and economic contraction.
[Sources: 1, 2, 3, 5]
Tariffs, being taxes charged on imported goods and services, can generate revenue for a country to help offset a budget deficit, and they can also safeguard domestic businesses from cheaper foreign competition. Finance ministers may implement tariffs to boost the nation's economy, as in the case of President Trump backing tariffs to bolster domestic manufacturing and secure more advantageous trade agreements. Additionally, learning about tariffs and how they impact trade, businesses, and finance is essential for understanding their effects on the economy, especially in today's global business environment.
